Market update - December 2017

The global equity market continued to rise through December, with all major equity markets closing out 2017 with strong gains, supported by the widespread improvement in economic growth. The US equity market saw particularly strong gains over the year, with 2017 representing the first time in history that the S&P 500 ended every month of the calendar year with a gain.

During the month, US President Donald Trump had his first major legislative victory as the Senate passed the administration’s extensive tax code reform bill, which includes a reduction in the corporate tax rate to 21%. Expectations of tax cuts have been one of the key drivers of US equity market strength since Trump’s election in November 2016. December saw continued improvement in the US economy, enabling the US Federal Reserve (Fed) to progress with a 25-basis point increase in interest rates (to 1.5%). The Fed raised its 2018 GDP estimate from 2.1% to 2.5%, whilst also increasing its inflation estimate from 1.6% to 1.7%.

December also saw Brexit (the potential departure of the United Kingdom from the European Union) remain in the headlines, with the conclusion of the first phase of negotiations in mid-December. While the final terms of the exit are yet to be agreed, the completion of the first phase indicates that there is sufficient common understanding on the terms of exit to allow the second phase of negotiations, which will finalise the terms of the transition period and exit, to commence.  Pressure on negotiations remains high, with agreement required by October 2018 in order to meet the deadline for ratification by the European Parliament in March 2019.

In Australia, the Reserve Bank of Australia (RBA) left the official cash rate on hold at 1.5%, with the bank citing low inflation and low wage growth as reasons for holding rates steady. Housing prices showed further signs of cooling, with the Australian Bureau of Statistics (ABS) National House Price Index dipping 0.2%. Commodities rallied, with Copper, Iron Ore and Coal spot prices all rising between 4% and 6%. As a result, the ASX300 Commodities index leapt 7.1% during the month, primarily driven by the smaller commodities companies in the index.

The investment returns of the major markets for one month, one quarter, financial year to date and one year to 31 December 2017 are summarised below.

Market Performance - 31 December 2017 Month Quarter FYTD 1 Year
Australian Equities 1.9% 7.7% 8.6% 11.9%
Australian Property (Unlisted)* 2.6% 3.6% 6.5% 12.8%
Australian Property (Listed) 0.1% 7.8% 9.9% 6.4%
Global Listed Property (Heged into AUD) 1.2% 3.9% 5.2% 9.2%
Overseas Equities (Hedged into AUD) 1.2% 5.7% 10.3% 20.7%
Overseas Equities (Unhedged into AUD) -1.7% 5.9% 8.7% 14.0%
Emerging Markets (Unhedged into AUD) 0.6% 7.8% 13.9% 27.5%
Australian Bonds -0.5% 1.4% 1.4% 3.7%
Overseas Bonds (Hedged into AUD) 0.2% 0.9% 1.8% 3.7%
Cash 0.1% 0.4% 0.9% 1.7%
Australian Dollar vs. US Dollar 3.0% -0.3% 2.0% 8.0%

Source – JANA, FactSet, S&P, MSCI, Mercer, Bloomberg, Barclays

The S&P/ASX300 Accumulation Index rose 1.9% over the month. Small Cap (3.2%) stocks strongly outperformed the broader market. Metals & Mining (7.3%) and Energy (6.5%) were the strongest performing sectors in Australia, while Utilities (-4.5%) and Industrials (-1.0%) were the weakest performers.

The MSCI World Index ex-Australia (hedged into AUD) rose 1.2% over the month. The Australian dollar appreciated against most developed market currencies in December, which resulted in a return for unhedged overseas equities of -1.7% (in AUD). In developed markets, the UK (5.0%) and Japan (1.4%) outperformed the broader market, while France (-0.9%) and Germany (-0.7%) underperformed. The MSCI Emerging Markets Index (0.6%) underperformed unhedged developed markets.

The Australian bonds delivered negative returns in December but global bonds were marginally positive.